VALUE INVESTING
Ten Top PYAD Shares

By Stephen Bland (TMFPyad)
July 5, 2002

Somewhat surprisingly, perhaps in view of the sharp market falls, my regular trawl for deep value shares (those satisfying my four basic PYAD filters) hasn't changed much in recent weeks. Here are the most recent results of the ten largest cap shares on the list in descending order.

UK Coal (LSE: UKC)
Allders (LSE: ADS)
Low & Bonar (LSE: LWB)
Hardys & Hansons (LSE: HDYS)
The Malcolm Group (LSE: MAL)
Foresight Technology VCT (LSE: FTV)
Northamber (LSE: LTHM)
Churchill China (LSE: CHH)
James Latham (LSE: NAR)
FW Thorpe (LSE: TFW)

The caps range from UK Coal at £136m down to Thorpe at about £14m. In fact, only UK Coal and Allders are over £100m and the next one down, Low & Bonar, is in at £70m.

Note that because of the way this particular database is designed, the filtering for the price to earnings (P/E) ratio and dividend yield were based on consensus forecasts, while the cash and net asset figures were taken from the last annual accounts with no updating for interims or news since.

Readers who are interested will need therefore to do their own research as to the quality of these shares, my selections were made simply by applying the four PYAD filters mechanically but without further investigation into things like projected earnings per share (EPS) rises, the nature of the assets, more recent information on net cash and assets and so on. Apart, that is, from Allders, which I hold and have done so for several months now.

Many of these shares have already been discussed on the value board from time to time. Northamber, which sounds like the title of a second rate nineteenth century bodice ripper, was the subject of this not so long ago for example -- value board discussion that is, not nineteenth century bodice ripping.

In all, the search threw up only 20 shares, most of them tiny companies. This number is actually reduced from when the market was much higher, which might at first glance appear to be a strange thing indeed. In theory, a really serious bear market should throw up more value shares, not less, as everything gets trashed by negative share sentiment. What this is telling us in general is that value shares, PYAD ones anyway, have not fallen by nearly as much as the market and consequently, relative to the market, many of them may not be as cheap as they were when it was higher.

Because my approach is dynamic, in the sense that I look for P/Es and dividend yields at a given discount to the market rather than fixed figures, that has probably ruled out some shares that would earlier have qualified. For example, my yield minimum has been set at 4.5% to produce this list whereas a year ago it might have been, say, 3.5%. If a share then appeared a year ago on my list at a yield of 4.0% but then hasn't fallen as much as the market then its yield may not have risen to qualify this time round and it drops out of the search list.

I have always maintained that value will hold up well in a bear situation and that is one of the basic reasons that value is attractive, the safety feature of minimising the downside, lessening the impact of a fall whether that fall is due to market sentiment or something going amiss with the share itself. Safety features alone of course are inadequate, you need something to make the share go up, not merely fall less and that something is usually rising EPS though there can sometimes be other outers such as when a share is very deeply discounted to its net assets, and those assets are particularly easily valued such as cash, property or investments.

With value, caution always comes first. Investors should initially consider methods of reducing loss if something goes wrong, not how much they might make if something goes right. Only when you have a relatively safe share do you then look for reasons for it to rise. Maximising the potential rewards against minimising the potential risks.

The author owns shares in Allders